Airline Weekly - March 28, 2011

Cover Story

Istan-Bull or Istan-Bear? Rising superstar Turkish Airlines shows cracks in the facade

Ten years ago, it was an industry nobody. By 2010 it was an industry superstar. But is the Turkish Airlines rocket ship running out of fuel?

Last week, the carrier unveiled a $191m net profit for all of 2010, with capacity up 15% y/y, traffic up 19% and revenues up 20%. Operating margin was a solid 6%, besting its European Big Three rivals. So what’s the problem?

For one, 2010 was the first year since 2006 that Turkish Airlines did not earn an operating margin above 10%. In addition, its formidable 20% revenue increase from the year prior was more than offset by a 26% surge in operating costs.

Perhaps most importantly, Turkish saw its performance worsen late in the year. In the fourth quarter alone, it managed a small $19m net profit, boosted by financial gains below the operating line. At the operating level itself, the result was a disappointing $28m loss, equivalent to a negative 2% operating margin—this during a three-month period in which Lufthansa, Air France/KLM and BA/Iberia all earned operating profits ex special items. Fourth quarter revenue for Turkish Airlines, moreover, grew 12% y/y, hardly shameful but well below its average growth rate of the past few years. That was on 10% more ASK capacity and 11% more RPK traffic. Operating expenses soared 20%.

Fuel inflation is certainly one explanation. Turkish saw its jet fuel outlays spike 23% y/y in Q4 and 42% for the full year. But other key cost items outpaced revenue increases as well. Labor, for example—the airline’s second largest expense after fuel—rose 25% last year. Sales and marketing outlays, inflated by heavy advertising in markets around the world, jumped 21%. Sponsoring Kobe Bryant doesn’t come cheap. But alarm bells are ringing on the revenue side too. In 2010, load factors in all seven of its geographic entities—domestic, Europe, the Middle East, the Far East... (328 of 1313 words)

Also Inside this Issue:

For most of the world, the peak spring and summer travel season is fast approaching, with airlines having almost made it through another dark winter. Unfortunately, it’s going out like a lion rather than a lamb, with another fuel shock complicating market disruptions from Egypt to Japan.

For U.S. airlines, however, such travails suddenly seem manageable, helped for sure by strong demand but more fundamentally by a sea change in the industry’s ability to deal with shocks. Billions in ancillary revenue provide a welcome new cushion. And more powerful still, industry consolidation makes it easier than ever to hose down fires with capacity cuts and fare hikes. In an industry famous for being “only as good as [its] dumbest competitor,” there simply aren’t as many competitors anymore.

The picture is cloudier in Europe, where trends show more variance by airline. The Big Three were modestly profitable at the operating level in Q4, while all other major carriers including Ryanair were not. Air Berlin, as disclosed last week, had one of the roughest fourth quarters of all.

For whatever it’s worth, western European carriers can take small comfort in new cracks splintering the Turkish Airlines growth machine. As this week’s cover story explains, the Turkish model remains impressive, but it’s not immune to overexpansion.

Nor is Finnair’s Asia-heavy business immune to trouble—the carrier warned of losses last week. So too, for that matter, did Australia’s Virgin Blue.

China’s Big Three, benefiting from domestic consolidation like their U.S. counterparts, report earnings this week. And on Friday, a new quarter begins.

About Airline Weekly

Airline Weekly is a subscriber-supported publication, paid for by readers who want a more interesting, more valuable read about the airline business. Each Monday, Airline Weekly reports who's flying where, new marketing approaches, fleet, finance and key airline and airport data. And, most importantly, Airline Weekly readers enjoy a critical context, insightful analysis and new ideas found nowhere else.

Sample Issue

Here's a sample issue of Airline Weekly.

Guarantee

If not completely satisfied, let us know and we will refund the purchase price.